What is a Suspense Account?

A suspense account is part of the general ledger where organizations record ambiguous entries that require further analysis before being classified. When it comes to investing, a suspense account is a brokerage account where you store cash until you can use it to purchase new investments.

Definition of Suspense Account

A suspense account is defined as:

1. A brokerage account where investors deposit cash and securities while they decide how to invest it. A suspense account is a low-risk account, as investors don’t want to lose the deposit while making financial decisions. The money is safe in this account.
2. An account where companies deposit and withdraw money for transactions that haven’t been completed yet. These accounts help companies keep track of any ongoing transactions on their balance sheets.

The transaction to open a suspense account is also considered to be in suspense. You can use a bank account to hold the money for a suspense account. Separating your accounts like this keeps uncategorized and categorized transactions separate for more accessible filing.

With accounting in small businesses, suspense accounts are regularly cleared out. This means that the account has nothing in it. Moving money out of the suspense account and putting it where it needs to bring the balance down to zero.

You eventually allocate the money from the suspense account to more permanent accounts. Don’t worry about how long that takes, as there are no standards on how long you have to clear out your suspense account. Businesses generally clear out the account on either a monthly or quarterly basis.

When to Use Suspense Account

Several situations call on you to create a suspense account. Here are the most common:

1. When preparing a trial balance

The trial balance is the closing account of a balance calculated at the end of an accounting period. If the credits and debits on an account don’t match, you can keep the difference in the suspense account while you go over the figures again and correct them.

If you have too much credit compared to debits, then you record the difference as a debit on the account. If the debts are higher, then register the difference as a credit instead.

The suspense account is listed under “Other Assets” on the trial balance sheet. Move the money out of the suspense account and close it when you finish so it isn’t part of the trial balance.

2. When Receiving Partial Payments

You may get partial payments from customers and wonder whether you should invoice it or not. Hold on to the money and store it in your suspense account until after contacting the customer. You can move the funds to the appropriate account and close the suspense account when you get the total amount.

3. You Don’t Know Who Sent the Payment

You may get payment without knowing whom the money is coming from. If you aren’t sure who sent the money, look over the outstanding invoices and find an invoice that matches the amount sent. Get in touch with the customer to verify they were the ones who sent the payment. Hold the money in a suspense account until you know for sure.

4. You Buy a Fixed Asset But Don’t Receive It Until You’ve Paid For It

A suspense account helps when you purchase a fixed asset on a payment plan but don’t get the asset in question until it’s paid off. You can close the account and then open a new account for the asset once you receive it.

5. You Arent Sure How to Classify A Transaction

It’s only natural to be unsure how to classify some transactions. You aren’t an accountant, after all. If you don’t know where to put money, then keep it in a suspense account until you can talk to an accountant and find out.

Example of Using a Suspense Account

A suspense account’s general purpose is to have somewhere to keep the money until you process it. You should only open a suspense account when you need it. Ensure that you close the account after moving the last of the money to the appropriate permanent account.

You’ll need to open an account in the general ledger to account for suspense account journal entries. Enter the total amount in the ledger. The amount is entered as a debit or credit. Don’t forget to include another entry with the same amount in another account.

You can reverse the entry when you have the information you need and put the money in the permanent account to close the suspense account.

Let’s take a look at suspense accounts in action:

1. Receiving Partial Payments

Let’s say you get a partial payment of $50. You open the suspense account and credit $50 to it. You debit the account for that much as well.

When you get the total amount, you debit the $50 from the suspense account and credit your accounts receivables for the amount. This will close the suspense account.

2. You Don’t Know how to Classify a Transaction

You receive a $1,000 invoice from a supplier. You aren’t sure which department to charge the money to, so you place it in a suspense account for the time being. You open the account and debit the suspense account and accounts payable as necessary:

You later bill the supplies to account for the purchasing department. You credit the suspense account and add a debit to the supplies department to close the account.

Please don’t hesitate to get in touch if you need more help understanding or managing suspense accounts. Our experts are waiting to help.